Vienna University of Economics and Business Administration

Case Study

Ducati: In Pursuit of Magic

Course: International Business Policy and Strategy Lecturer: Dr. Christian Kreuzer

Team: Sumner Kuehne Maria Igumnova Victoria Soroka Ajmal Khan

2009

1.

Summary Ducati is the Italian motorcycle manufacture, known for the high quality and

representative Italian design. Ducatis relevant market is considered to be the Sport segment over 400cc (motorcycles in the sports, sport touring and related categories) and was estimated to have annual volumes of 642,000 units in 2005. 1996-2001 the company has experienced a significant financial growth, thanks to the turnaround strategy implemented by the new companys CEO Federico Minoli, whose main aim was to strengthen Ducatis brand and create The World of Ducati. Although Minolis turnaround strategy was successful, 2002-2005 the company underwent financial stagnation. 2. The Problem

Ducatis CEO, Federico Minoli, has to solve the problem of Ducati`s financial stagnation that began in 2002 and determine the best way to grow. 3. Cast of Characters 3.1. People

Federico Minoli is Ducatis CEO and chairman, he joined near bankrupt Ducati in 1996, and led its turnaround by creating the World of Ducati and strengthening the Ducati brand. Minoli had a long list of accomplishments, starting in the Italian division of Procter & Gamble in 1974 and later moving between consulting firms (McKinsey and Bain & Co.) and industry (as the CEO of the U.S. division of Italian garment brand Benetton). 3.2. Institutions or events As far as Ducati is actively participating in Racing Competition in order to promote its brand, in 2005 the separate company Ducati Corse SRL was spun off for managing Ducatis racing teams and the manufacturing of specific motorcycles for competitions. 4. Chronology 4.1. Today

2006 - Ducati is producing motorcycles in the Sport segment across six families: Superbike, Super Sport, Sport Naked, Sport Touring, Multistrada and Sportclassic. Within each family, Ducati offered several variations on engine capacity, design and color schemes. All families shared common characteristics, which gave all Ducati bikes a unique look and feel: Desmosystem; L-twin design; signature low-hum engine sound; one-inspired tubular trestle frame; italian styling. Ducati keeps on investing huge amount in research and development.

4.2.

Yesterday

1926 - Societa Radio Brevetti Ducati was set up in Bologna, Italy, by Antonio Cavalieri Ducati and his three sons set up as a manufacturer of electrical components for radios. 1946 Focusing on engineering new products; launched il Cucciolo, a small auxiliary motor that could be attached to a bicycle to provide enhanced speed. 1954 - Introduced new models that were very successful in the races (braking previous records by surpassing speeds of 162 km/hour); Implementation of the Desmodromic valve distribution system (a.k.a.Desmo system), allowed for more revolutions per minute and greater power, that is used in Ducati motorcycles till nowadays. 1960s-70s - launching several successful models, for example, twin cylinder 750 Supersport, which signaled Ducatis dominance in motorcycle racing in the early 1970s. Besides racing, experimenting in other sectors, such as submitting a bid to supply police forces in the U.S. with the Ducati Apollo in the 1960s and a luxury scooter called the Cruiser from 1964 to 1967. Early 1980s - the company was losing money. Its majority shareholder (a state-run enterprise) diverted Ducatis focus from motorcycles to other mechanical products such as small diesel engines. However, the strategy was not successful. 1983 purchase of Ducati by the Castiglioni brothers under the umbrella of their company, the Cagiva Group and Ducati; going back to motorcycle racing; emerging of new motorcycle models, one of them, Ducati 916 that was awarded the Motorcycle of the Century title in 2000 by the leading British magazine MCN. However, despite the success of the Monster and the 916, the Cagiva Group did not have sufficient working capital funding to purchase raw materials this resulted in late deliveries and production delays. 1996 - Ducati was on the brink of bankruptcy. A controlling interest in Ducati was bought by a private equity firm, Texas Pacific Group, with the belief that the company had a strong niche position in the global motorcycle industry. - Federico Minoli was hired by Texas Pacific Group as Ducatis new CEO. He believed that Ducati had three top-notch attributes: a unique and differentiated product, a group of highly skilled engineers, and a brand with high loyalty. He initiated large investments into improving the Ducati brand. The first major investment was commissioning the building of a Ducati museum.
- Minoli and his management team created the World of Ducati, which was a strategy

aimed at all aspects of the Ducati experience and reinforcing loyalty with the loyal Ducatisti. To take advantage of the strong Ducati brand, Minoli purchased a controlling interest in

Gio.Ca.Moto; an apparel and accessories company that had been producing products for Ducati. It also formed a joint venture with Dainese to develop and manufacture special riding equipment. 1997 Introduction of a new Sport Touring line targeted at an older crowd (over 70 percent were over 30 years old; Ducatis typical sport customer was 18 to 30 years old); expanding offerings within each family of products. 2000 Intensive investments in research and development to build up new products under each family and the racing division; the time to market for new models was significantly reduced. - The companys turnaround strategy produced positive business results. Revenues climbed from 195.6 million in 1997 to 379.5 million in 2000. EBITDA moved from 33.4 million in 1997 to 60.0 million in 2002. 2002-2005 - Ducatis financial performance stagnation. Revenues fell 2.3 percent on a compound annual growth rate from 2000 to 2005, and EBITDA fell to -273,000 at the close of 2005. In 2005, the company posted an after-tax loss of 41.5 million in comparison with a loss of 3.5 million in 2004. Revenues from motorcycles decreased 13.1 percent. In addition, spare parts, accessories and apparel sales dropped by 3.8 percent. Compounding the issue was the drop in the U.S. dollar against the Euro, which cost Ducati an estimated 19.3 million in EBITDA in 2004.

5. Issues 5.1. In order to define the main issues that are in conflict and relevant to the problem of Ducatis financial stagnation, we decided to make a SWOT Analysis that helps to determine and understand the main strengths, weaknesses, threats and opportunities of the company. SWOT Analysis of Ducati Strengths 1. Technological advantages: Desmosystem; one-inspired tubular trestle formula; L-twin design; signature low-hum engine sound 2. Strong brand name, therefore high loyalty 3. Italian styling that makes Ducati motorcycles unique 4. lower seating and a lighter weight making Ducati bikes attractive for female riders 5. Continual winning of World Superbike Championships 6. Active investing in Research and development 7. Creative and highly professional team Weaknesses 1. Product discontinuity due to the replacement of the popular 998 model with 999. 2. Specialization in narrow segment, no experience in producing cruisers and off-road bikes. 3. Weaker brand popularity outside the Europe 4. Dependency on suppliers (the production of the 90% of the parts are outsourced) 5. Ineffective organizational structure high distribution costs and general and administrative expenses 6. Problems with distribution in the U.S. 7. Relatively small size in comparison

8. Cooperation with external designers 9. Reciprocal communications with customers (online feedback, surveys) 10. Active and efficient relationship marketing via participating in racing, organizing motorcycle training sessions and tours (World Ducati Weekend), establishing Desmo Owners Club and supporting enthusiasts club, grounding of Ducati museum Opportunities 1. Predicted growth of the market for sport motorcycles segment over the next few years by 2-3% 2. Increase of the of the purchasing power in the BRIC countries 3. Great possibilities for growth in the market of accessories, spare parts and apparel 4. Constantly growing number of women riders among the consumers.

to competitors

Threats 1. Tough competitive pressure in the market, especially from Japanese companies in terms of technology and costs 2. Currency fluctuation 3. Possible takeover by the companies outside of the motorcycle industry, such as Bombardier or Red Bull 4. Feasible legal restrictions on selling the motorcycles in some developing countries (for example, in China)

5.2. Porter 5 forces model can also be relevant for estimating the companys position on the market relating to the competitors, byers, suppliers, substitute products and new comers. Competition within the motorcycle industry Competition is a motorcycling manufacturing is really tough; it is a very challenging issue for Ducati, as long as it continues to be a small company in comparison to the main competitors. Ducati is performing in the very narrow market segment, Sport motorcycles, which is in fact saturated with lots of competitors. According to the data of the year 2004, Ducatis market share in total motorcycle market amounts only 0.7%; Dicatis market share in its relevant market is 4.4%. The medium-priced segment is dominated by Japanese manufacturers such as Honda, Yamaha, Kawasaki, and Suzuki, which provide value-for-money. They are systematically upgrading the technology and lowering the prices at the same time (Japanese high-tech sport bikes are priced from 4,500 to 16,000). All this can draw away a significant number of customers who are sensitive to the price.

Bargaining power of customers Ducati has a quite strong position in its niche market, due to the unique technological and design characteristics (Desmo-System, L-twin design), that increases its bargaining power against its customers. The creation of World of Ducati resulted in a very high Ducatis brand loyalty, that is why the buyers price sensitivity is probably not a problem for Ducati, the loyal customers will be more willing to pay a premium price for their preferred brand. As far as switching, cost are not really high, and there are lots of similar product produced by competitors, customers can switch from Ducati to the other brands quite easily. Bargaining power of suppliers 90% of the components for Ducatis products are outsourced to third parties, that surely can cause significant problems, but thanks to the implementation of platform approach and establishing stable relationships with key suppliers Ducati made itself rather secure. At the same time all Ducati products are manufactured in its own facility in Bologna that also add confidence in the future. Threat of substitute products If we consider a motorcycle only as a mean of transport, then there would be a great variety of substitute products from the bicycle to the train. But motorcycle offers more than just a possibility to get from point A to point B, it represents the way of living, that is why there are no direct substitutes for such products. Threat of new entrants Entering the automotive and namely motorcycle industry capital intensive and time consuming prosess. It requires huge investments in building manufacturing facilities, research and development, establishing distribution channels and surely creating brand awereness and loyalty. All this creates rather high entry barriers for potencial competotors. Another obstacle for new entrants is the relative saturation of the market. 6. Potential new entranrs are those alreary operating in the automotive industry.

Options Invest in technology and focus on the core business to stay a niche producer while

continue investing in the brand equity. Advantages:

Low risk, as far as the company is already quite successful in producing and selling its core products motorcycles in the sport segment. One of Ducatis core competences is the technology (for ex., Desmo system), so if the company will follow this option, it can invest more in development and improvement of technology and therefore fortify its market position

Ducati can keep on strengthening its brand name, owing to upgrading technology and developing the idea of The World of Ducati. Continuing targeting to a niche segment and not to the general market can also benefit to Ducatis financial performance. Thanks to the upgraded technology and a strong brand Ducati can continue to benefit from the premium pricing. Ducati can also sustain and increase the sales of accessories, spare parts and apparel Following this option Ducati potentially loses the opportunity to gain from entering other motorcycle segments like cruiser and off-road. Focusing on only one market segment decreases Ducatis capability to diversify risks. Any negative changes in the segment can seriously affect Ducatis performance and even take Ducati out of business.

Disadvantages:

6. 2. -

Invest in product lines, and enter the cruiser, touring and off-road market. Entering new market enables larger sales and revenues Possibility to increase the brand awareness and attract new groups of consumers. New products can be launched on the basis of existing technological and design knowhow and distributed via existing distibution channels. Possibility to create a more diversified portfolio in order to decrease financial risks As far as the cruiser an off-road segments are considered as growing in the US market, Ducati could get the opportunity to strengthen their position in the US market.

Advantages:

Disadvantages: Entering this market will require a significant investment in R&D, manufacturing facilities and marketing research. The company will not be able to compete with companies who are already experienced in this segment and have great brand awareness.

Ducatisti could become disappointed with the idea of creation of Ducati cruiser or Ducati off-road bike. Consequently, the company could start losing its loyal customers and losing brand equity.

Launching new products could also lower attention and even divert money from the main sport segment that could weaken Ducatis position against competitors and harm the Ducati brand.

6. 3.

Enering new markets (BRIC countries) with Ducatis core products sport

Motorcycles. Advantages: Entering new markets enables Ducati to expand its sales, promote its brand and gain additional revenues. The possibility to use the existing technology. As long as the company will stay within the same segment there is no need to implement a complete different production technology BRIC countries are perceived as a very perspective market due to the emergence in the recent years of the new rich segment, which has started to consume North American and European luxury products very actively. Disadvantages: High risk not to withstand the competition with the Japanese producers The need to invest significantly into the building additional manufacturing facilities in order to meet the demand The need to establish effective distribution network The need to invest into the marketing in order to promote the Ducati brand High level of country risk due to unstable political and economical situation in BRIC countries an currency fluctuation 7. Recommendations Having weighted all pros and cons of the suggested options we would recommend Ducati to pursue option one - to stay the niche producer and to invest heavily in the technology and brand image. As far as unique technology, solely used by Ducati, is one of Ducatis core competences, the company has to keep investing in it actively in order not to lose its positions in the market. Further investing in research and development will help Ducati to stay on target in pursuing a growth strategy by using the companys strengths and

improving the companys weaknesses. By the way, this option also can create an immediate positive impact on Ducatis financial position, as management can focus on improving its core operations in order to reduce costs and create synergies. Another core competence of Ducati is its brand, which is why the company has to invest in the brand equity as well. Concerning the brand there are several relevant issues: The brand of Ducati has clear-cut associations with the sport segment, with so-called performance motorcycles. Customers value Ducati for its unique sporty style with the forward seating and L-twin design. Switching to another segment can disappoint customers, because they can stop to perceive Ducati motorbikes as unique products, which may lead to the decrease in sales in the main segment. That is why in order to strengthen the brand equity and not to lose loyal customers Ducati has to promote the idea of exclusiveness. Launching the cruiser or off-road bike or solely focusing on apparels could mean damaging this image forever. It is more appropriate for Ducati to choose the first option, because options two and three involve great investments in the creation of new projects, building new manufacturing facilities, establishing distribution system and marketing, therefore the core business operations would most likely be ignored. At the same time it could be very risky, because Ducati does not have that expertise in the cruiser and off road segment as competitors do. Although new products promise new revenues, it could be more reasonable to recover at first after the stagnation period, to strengthen its position and maybe then to start thinking about entering new segments. Focusing on the first option allows Ducati to avoid splitting of resources and concentrate on the developing of the existing technology and design in order to better compete with Japanese motorcycle manufacturers on the issue of technology and quality standards. Strong Ducatis brand, which is representing not the product, but the way of life, the world of freedom, delight and exceptionality can give the company a possibility to keep implementing very profitable price strategy. Customers, which see in the additional benefits in the image of Ducati become not very price sensitive and are ready to pay a premium price. Strong brand name also allows Ducati to gain huge revenues from selling accessories and apparel, which are perceived as being highly fashionable. Active collaboration with external designer also can contribute to the creation of a highly valued brand.

The idea of freedom independency, sophistication and style also gives Ducatti a possibility to attain success among female riders, number of which is constantly growing

Ducati has to carry on the idea of creation of the World of Ducati via maintaining and encouraging close relationship with its customers

8. Plan of Action Plan of actions in Production: Investment in technology upgrading; implementation of the latest achievements in the automotive engineering; development o a woman segment getting best specialists involved crating long-term relationships with suppliers strengthening its position in production accessories and apparel under the Ducati brand via concluding contracts with manufacturing company that can promote the idea of World of Ducati active cooperation with external designers while elaborating new models Invest more in marketing research to better forecast the future direction of consumer tastes in motorcycle industry in order to avoid product discontinuty. Strentherning close connections with customers via international and regional internet sites (Ducati.com, Ducati.it, Ducati.at, Ducati.es etc.)and using them as an instument to get feedback, carry out surveys and promote Ducati products. Keeping on investing in the World of Ducati concept and promoting its brand via racing sponsorship, performances in Ducati Museum, activities for members of D.O.C and Ducati fans. Promotion of the woman segment; creation of an advertising campaign targeted on the women via collaboration with companies producing high branded woman products (clothes, cosmetic and fragrances, apparel). Plans of actions in Distribution: Review the current distribution network to find synergies and possible overhead cost cuts. Plan of actions in Marketing:

Strict selection of independent dealers in order to ensure that they can provide the highest standards and correspond with the idea of Ducati Enter into talks with other European brands about creating the House of European Motorcycles in the United States